Ashes to Ashes

I cover the carbon trading disaster in The Value of Nothing, and every day brings more evidence that it’s an idea riddled with holes. Europol, the European Police Office, has recently uncovered over EUR 5 billion (over US$ 7 billion) in carbon fraud in the past 18 months alone. (They also provide a handy diagram explaining how the fraud works.) The problems aren’t exclusively European, though. The excellent Outlook India reports on the fiasco in the world’s second largest country. More below the fold.

Climate change is the newest, fastest way to make money. For corporate India, as also for much of the industrialised world, global warming is bringing in cash like never before, and throwing up novel opportunities to make more, all in the name of reducing emission of dirty greenhouse gases (GHG). But even as it’s rush hour on the ‘climate’ train to riches, there are serious reservations being expressed about whether the current market-linked mechanism to battle climate change is really reducing GHG. Are the industries of developing countries like ours getting away with short-term profits in the name of climate change while they continue to damage the environment and inflict more permanent damage on the people? Why are carbon trading and Clean Development Mechanisms (CDM) fast becoming dirty words in the green activist’s lexicon?

It all began some five years ago when the first project was registered with the United Nations Framework Convention on Climate Change (UNFCCC) under the CDM. This was the result of an agreement at Kyoto, Japan, in 1997 (Kyoto Protocol) which was subsequently ratified by several countries. It enables developed countries to achieve emission reduction targets by paying for greenhouse gas emission reduction in developing countries.

First World countries are expected to buy certified emission reduction (CER) aka carbon credits, or earn them by investing in green projects under the CDM process. CERs are a ‘certificate’, like a stock, and are used to trade emission credits. Emission reduction projects can range from growing bio-fuel crops to installing machinery at a chemical plant, from neutralising GHGs to building a hydel generator. India ranks second, after China, in developing CDM projects and generating carbon credits.

The Great Carbon Farce

Under the Kyoto Protocol, developed countries must reduce their greenhouse gas emissions. Since this affects growth, most buy credits. Here is how carbon trading works.

Clean Development Mechanism
The carbon trade to meet Kyoto Protocol targets is registered and monitored under the Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change. India has 478 registered CDM projects, accounting for 28.3 per cent of the global credits. Each credit, equivalent to a reduction of one metric tonne of CO2, sells from anywhere between Rs 650-1,115. This has potential to generate annual revenue worth several hundred million dollars.

Getting Dirty

Credits generated do not necessarily mean reduction in emissions. Consultants can give positive assessments and national authorities can look the other way.

To get CDM status for an industry, firstly one has to prove to the UNFCCC that it is an ‘additional’ project. This means the company has to show it is financially unviable to take up the green project in the absence of western investment. And that with these financial inputs there would be an additional reduction of emissions. A CDM project should also promote sustainable development.

But in practice, many ‘non-additional’ projects (those by big companies that could have come up anyway without western financial aid and which may not lead to additional reduction of emissions) are managing to get CDM registration. Activists call it a fraud.

How can a project get fraudulent credits? “This is because UNFCCC has neither the mechanism to credibly assess the projects nor the will, it seems,” explains Gopal Krishan, an independent environment researcher. The first step in the chain is the designated national authority (DNA), which in India’s case is the ministry of environment and forests. The DNA certifies whether or not a project qualifies for CDM. But as Himanshu Thakkar of the South Asia Network on Dams, Rivers and People (SANDRP) points out, “The government sees the carbon credits as free gifts to be given to industries, something which will bring more money into the country. It does not bother too much to see if the projects submitted are indeed sustainable.” In 2008, SANDRP applied under the RTI to know how many applications for CDM projects had been rejected by the ministry and on what grounds. “They replied that they don’t keep a record of such rejections! To the best of our information, they have not rejected any,” Thakkar told Outlook.

Meanwhile, sustainable development is nowhere in sight. If anything, it’s only more of ‘sustained’ development for the enterprises that earn windfall profits from carbon credits. It has been found that many firms running or seeking to run these “clean” projects have dubious environmental credentials and bother little, if at all, about the environment. Some of the worst offenders in this category are sponge iron units in Chhattisgarh. They have been hauled up by the Chhattisgarh Environment Conservation Board for polluting with impunity. Some plants hauled up by the CECB include SKS Ispat and Godawari Power & Ispat Limited. Each of these plants registered since 2006 earns thousands of dollars each year under the CDM but does little to protect the local environment.

These plants are guilty of emitting a higher level of suspended particulate matter than allowed, sending out noxious fumes and having improper solid waste disposal. An environmental audit on CDMs by the British House of Commons three years ago said the carbon offset industry was clearly encouraging pollution and global warming by associating with India’s “notoriously dirty” sponge iron industry.

The audit criticised two Indian CDM projects—that of SRF Limited in Rajasthan and Gujarat Flurochemicals Limited—that destroy hydrofluorocarbons (HFC), the powerful greenhouse gases used mainly in refrigeration. The House of Commons cited this as a case of “perverse incentives”, since any country making money out of something as harmful as HFCs is unlikely to ban its use as mandated by the 1987 Montreal Protocol.

In another instance, the Allain Duhangan Hydroelectric Project in Himachal Pradesh, registered in 2007 with 4,94,668 carbon credits per annum, has paid colossal fines to the ministry of environment and forests for violating green laws. It has paid over Rs 2 crore for illegal damage to trees, Rs 20 lakh for improper dumping of muck and over Rs 22 lakh for illegally encroaching upon forest land. “It shows how the CDM has become a way to access easy finance for projects that are neither beneficial to the local people nor to the local environment,” says Thakkar. “Of the 12 projects that I screened vigorously, not one reduced emissions.”

The “notoriously dirty” sponge iron industry of India got major flak in a House of Commons audit on the CDM.

Kushal Yadav, climate change programme coordinator for the Delhi-based Centre for Science and Environment, says, “If you get down to the levels of CERs, the number of non-additional (fraudulent) CERs issued would certainly be much higher than 40 per cent.” Barbara Haya of the University of California at Berkeley studied 85 CDM projects in India and China in the last six years and she says: “Over 50 per cent are non-additional.” In plainspeak, more than half are a fraud, a bubble, or in this case, hot air.

At least one western government has even factored in credits from non-existent projects as part of their mitigation plans. “The government of Luxembourg actually claimed last year that it would be buying credits from the Timarpur Okhla Waste Management Ltd in Delhi beginning April 1, 2009. But what’s shocking is that the plant is not even there on the ground. How can you claim that you will be buying credits from a plant that does not even exist?” Yadav asks.

Independent agencies called designated operational entities (DOE), which are registered global consultancy organisations that are supposed to act as validators/verifiers of the projects for the UNFCCC, are meant to be one of the checking mechanisms. But this too has proved a failure because they are commercial entities. Paid for by the project developers, theirs is an obvious case of conflict of interest. A WWF report on the carbon trade had stated that there is growing pressure on does to positively validate project proposals given the intense competition between them. At least one DOE, it added, had ironically signed contracts in which the last payment by the client is due upon the successful registration of the project.

This malaise of greenwashing unsustainable projects and rewarding them with carbon revenue seems to have even hit the UNFCCC’s top echelons. Eva Filzmoser, of the Germany-based CDM Watch, says, “There is growing evidence, as reported by the New York Times, that members of the CDM executive board have been aggressively pushing projects promoted by companies from their home countries irrespective of their merits as sustainable projects.” This has raised demands for a credible code of conduct for board members which factors in conflict of interests and creates transparency in their working. But with so much ‘credit’ at stake, that’s easier said than done.